Doing capitalism in the innovation economy

Doing capitalism in the innovation economy

08.03.2013 Blog

On Friday the Institute for Public Policy Research (IPPR) hosted a talk by William Janeway on the subject of his new book, ‘Doing Capitalism in the Innovation Economy’. Janeway was joined by Professor Birgitte Anderson of the Big Innovation Centre (BIC) and Stian Westlake from NESTA. Janeway has had an extensive career in investment banking and venture capital as well an academic career at the University of Cambridge. The talk summed up his book and described what he thought were the enemies of innovation and the role of the state in the innovation economy.

Janeway explains that “the innovation economy begins with discovery and culminates in speculation” – it starts with experimentation upstream in research and development and ends with experimentation downstream as financial speculators back the prospects of the new. Through the process of trial and error, discovery and exploration define the innovation economy. Janeway claims that once an innovation has changed the world for the better it often becomes an established part of the infrastructure.

The Three Legged Stool

Janeway described the innovation economy as a three legged stool propped up by; financial speculation, market relations and the state. In his presentation he focused mainly on the state and its role in the innovation economy. Janeway builds on the ideas of Friedrich List, his “favourite forgotten German economist”, who disagreed with Adam Smith’s ideas of laissez faire economics.  List insisted that without the state’s involvement in growth, England would have remained a “sheep-farm” rather than an industrial nation. Janeway points to post-War USA and modern day China to emphasise the importance of state investment in the innovation economy. The state he claims has a number of advantages in relation to innovation.

First, it can politically legitimise large scale investment in infrastructure. For example, massive highways across North America were commissioned in the 1950s in order to accommodate military vehicles. These highways in turn have often been described as vital in the shaping of the USA as a world industrial economic superpower (Weingroff, 2000). Second, competitive private firms strive for efficiency and therefore won’t invest as heavily in R&D due to the inherent waste and inefficiency involved in trial and error. For example; Federal Government in the USA funds over 50% of all R&D. Janeway therefore describes the job of the state as building a platform on which economic actors can dance.   

Janeway views financial speculation and bubbles in particular as banal but necessary. Anything to do with R&D must be based on speculation; therefore without financial speculation it would be difficult to gain funding in R&D. However, he recognises the financial crisis of 2008 as proof that markets cannot control themselves and sees it as the state’s role to regulate markets that are likely to breakdown and to commit to long term R&D projects. Janeway is not alone in emphasising the state’s role in innovation. His book shares some common themes that emerged from the EU FINNOV project led by Mariana Mazzucato that insists the state must take a leading and entrepreneurial role in supporting and developing innovations.

Enemies of social innovation

With all this in mind Janeway points to two enemies of innovation; efficiency and austerity. His first point is that waste is a by product of innovation due to the very nature of the innovation process. Therefore, a system searching for efficiency is not going to have much patience funding innovation projects. His second point highlights the paradoxical nature of austerity during times of financial crisis. He takes a Keynesian stance on government intervention, and described the classic “bottle story”, insisting that government spending on even the most banal activities can be beneficial for the private sector and job creation. In Janeway’s opinion austerity is not a good time for innovation as R&D relies on government spending and high employment rates.


Following Janeway’s speech there were replies from Professor Birgitte Anderson and Stian Westlake who built on the themes in Janeway’s book, adding some ideas of their own. Anderson’s response included three main points.

First, she insisted that the state must be an enterprising state and that it is dangerous to blindly follow a neoliberal ideology where the private sector is seen as good and the public sector as bad. She noted this narrow view as being the dominant paradigm in the United Kingdom and urged David Cameron and Nick Clegg to read Janeway’s book. She emphasised Janeway’s three players in the game; the state, financial markets and speculation and the importance of these three “playing nicely”.

Second, she identified the links between these three players and encouraged different actors to work together to strengthen the economy. She called for collaboration between different sectors with a common interest in economic stability. She claims that many organisations, from banks to universities, are too self interested and this gets in the way of economic growth. 

Finally, she emphasised the prominence that Janeway gives to the technological era as a new innovation paradigm. As a technological optimist she described the potential of new research and development to open up space for exciting innovations to take place.

Westlake made responses around two questions; what drives innovation? And what is the state’s role in this? With regards to the first question Westlake jokingly suggests that innovation is driven by “optimists systematically misrepresenting the future”. The majority of innovations tend to fail however; the ones that make it through the cracks can become revolutionary. Westlake suggests that a sort of “benign idiocy” drives innovators. He suggests this because at the individual level innovation often does not make sense; it is risky, time consuming and the investors/innovators are unlikely to be the main beneficiaries. Yet at the larger scale of the community or even the nation they make a lot more sense and this is why the state needs to get involved. 

Westlake also referred to Friedrich List when he described the concept of ‘national systems’ as particularly good for spurring innovation – nations have different problems, solutions and systems and therefore the role of the state is to identify these issues and figure out what works in a particular context. The state, he suggested, should be funding experimentation and making room for new innovations to flourish.


The main conclusions reached by William Janeway were that the state should play an important role in innovation and at two levels. First, the state should reverse its austerity programme as he claimed that the system of creative destruction is more creative and less destructive when growth and employment levels are high. Second, the government should be involved in creating customers for products of innovations as well as encouraging investors and this process may be inefficient but is highly necessary for the success of innovation.